Cayman Islands Welcomes IMF Review

by Phillip Morton, Investors Offshore.com

14 December 2009

The International Monetary Fund has observed "substantial progress" by the Cayman Islands with regards financial sector regulation in its latest report on the jurisdiction.

Progress areas identified include changes to legislation, rules and guidance to meet international standards, increases in the Cayman Islands Monetary Authority’s (CIMA) independence, resources and efficiency, as well as increased transparency of the funds sector arising from the implementation of CIMA’S electronic reporting system. The report makes recommendations for enhancements in 10 areas but acknowledges that these recommendations “are broadly consistent with the priorities already identified by the authorities and in most cases where policy action is already underway.”

The report is based mainly on information obtained during the IMF’s March 2-13 mission to the Cayman Islands, and on subsequent consultations with CIMA. The mission’s purpose was to review developments in Cayman’s supervisory and regulatory framework since the first assessment in October 2003. These jurisdictional reviews are part of the IMF’s offshore financial sector assessment program.

Given the global financial crisis, a major new focus of the mission during this year’s assessment was risk identification and mitigation. The recommendations emphasize these aspects as part of the strengthening of Cayman’s regulatory and supervisory system, while recognizing that it “has important elements of an effective crisis management framework.”

The report assesses CIMA’s powers, resources, and risk management framework; the supervision and regulation of banking, insurance, and investment funds and securities (including the role of the Cayman Stock Exchange); and comments on the private sector pension system. The document also summarizes the findings of the Caribbean Financial Action Task Force’s 2007 review of Cayman’s regime for anti-money laundering and combating the financing of terrorism.

Cayman Premier, McKeeva Bush, welcomed the report: “Once again we have an external assessment that gives evidence of this jurisdiction’s commitment to providing sound regulation in line with the best international standards. We voluntarily participated in this assessment and welcome any others that are objective as we are confident that our financial industry and the supervisory regime can stand up to any scrutiny. The government broadly accepts the recommendations and it is our intention to give priority to implementing them in a timely manner, as far as best serves this jurisdiction and contributes to the stability of the global financial system.”

CIMA’s Chairman, George McCarthy, said the report “reflects the high standards that CIMA strives to meet and the seriousness with which the Authority takes its role.”

Cindy Scotland, Managing Director of CIMA, agreed: “International regulatory and supervisory standards change as global financial business evolves and as new risks emerge. As regulator, we always have to be doing our own assessments and adjustments and engage our regulatory counterparts, industry, and international standard setters to ensure we keep abreast and contribute to these developments. I therefore find the IMF’s recommendations very valuable.”

The main recommendations contained in the IMF report are to:

• strengthen the legislative structure for the independence of CIMA, beginning with passage of the pending draft amendments to the Monetary Authority Law;
• conduct a formal risk assessment and focus CIMA’s supervisory efforts more directly on the key risks facing the jurisdiction, such as operational and reputation risk;
• formalize and validate the assumptions underlying CIMA’s supervisory approach that relies on the strength of supervision applied elsewhere and the contribution of licensees and other domestic professionals to the oversight of financial intermediaries;
• formulate a robust framework for supervising licensees cross-border and cross-sectorally to help prevent regulatory arbitrage or supervisory gaps;
• draw up contingency plans to handle the failure of important institutions;
• make CIMA’s enforcement powers consistent across all administered legislation and set the monetary penalties high enough to make them effective and dissuasive;
• review the human resource budgeting policy and reassess the process regularly to ensure the continued adequacy and quality of regulatory resources;
• monitor international developments to ensure that the regulatory regime in the jurisdiction incorporates elements of international best practice as it evolves;
• enhance regulatory reporting and disclosure requirements of financial entities; and
• implement a risk-based solvency regime for the insurance industry.

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